NAB's sale of MLC follows three core strategic failures

After almost 20 years trying to marry banking and large scale financial advice National Australia Bank is throwing in the towel with the sale of the MLC wealth management business.

A business bought for about $4.6 billion in 2000 should fetch about $3 billion given the current earnings multiples for rival stand alone wealth management businesses such as IOOF Holdings. The bottom line calculation of what NAB made out of wealth is not as bad as these two numbers make out but more on that later.

The scandals have probably contributed to NAB's decision to get out of wealth but the truth is the end of the bank's long flirtation with bancassurance is driven as much by financial considerations as it is by management's failure to bring together two very different cultures.

In the heady days of 2000 when NAB bought the business from Lend Lease there were high expectations that the bank could leverage its huge branch network and millions of customers to cross sell life insurance and managed funds. The purchase of MLC followed board consideration of the possibility of purchasing Colonial but Commonwealth Bank bought that for $5.78 billion.

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At that time NAB did not worry about the fact that its staff knew very little about advice. Also, they did not seem too worried about the vast gap in cultures.

Salaried bank tellers with the sole job of serving customers were suddenly being given financial incentives to push people towards financial planners earning commissions.

In hindsight, NAB's three core failures with MLC were its inability to recognise the wealth life cycle of Australians, its lack of understanding of how the world changed after the global financial crisis and its siloed approach to banking and wealth.

Failure of strategy

The wealth life cycle in Australia has always been tied to property. The single largest financial commitment of most Australians has been buying a house or apartment.

Buying a house was different to any other service purchased by households. It forced customers to earn the trust of the bank.

But once the bank afforded that trust to mortgage borrowers it dropped the ball. NAB and its rivals with wealth management businesses failed to capitalise on the mortgage lending relationship to build a deeper more lasting and holistic relationship.

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The banks should have been closely monitoring the evolution of their customers' loan to value ratios as the trigger for offering wealth management products. LVRs have always been a key indicator of changing household wealth.

Instead of a blanket approach of flogging MLC products to build the profitability of MLC, NAB should have been monitoring LVRs and moving strategically to offer tailored products to each client as their wealth journey evolved.

It is notable that NAB has kept its JBWere private banking business. It has tremendously loyal customers, about 10,000 who have a direct relationship and another 20,000 through external broker networks.

JBWere is a sizeable business with about $25 billion in funds under management and a total of $60 billion in funds under management and advice. The other asset remaining with NAB is the bank's online broker Nabtrade, which has about 300,000 clients.

Nabtrade gives the bank a lasting connection with self managed super funds, which are increasingly the preserve of sophisticated investors able to be offered wholesale products that do not require any advice.

In total NAB probably spent $5.6 billion building a position in wealth including the cost of MLC Life, Aviva Boutiques and asset management businesses. It sold 80 per cent of MLC Life for $2.4 billion and picked up $500 million in re-insurance proceeds.

Its 20 per cent stake in MLC Life is probably worth about $600 million and the sale of MLC Wealth should generate at least $3 billion. That leaves a difference between the purchase price and sale price of about $900 million, not including dividends paid during ownership.

MLC could be attractive to private equity given its scale and reach. The other alternatives are a demerger or initial public offering by the end of 2019.

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MLC Wealth has more than 1200 financial advisers, both in-house and aligned, the largest retail superannuation fund in Australia with funds under management of $78 billion and an asset management business with $199 billion in assets including $141 billion in portfolio management and $58 billion in investment management. MLC had pro-forma cash earnings of $102 million in the half year to March.

Slow to recognise change

The second big strategic failure that affected MLC was NAB's lack of understanding of the true impact of the global financial crisis.

This was a watershed in Australia and elsewhere because it changed the dynamics of trust between consumers and financial institutions. NAB and its competitors were very slow to recognise this change and stuck with their banking style approach where the consumer had to earn the trust of the institution.

The crisis changed the way banks should have dealt with conflicts of interest. This new paradigm is coming but only through the sale of the wealth management and life insurance businesses.

Westpac Banking Corp is the exception to that rule but it will be interesting to see how long it can hold out. Its attitude may change depending on the recommendations of the Hayne inquiry. Westpac could slim down to a private banking style model with wholesale products sold to sophisticated clients.

The third strategic failure was NAB's silo mentality which managed to survive despite many changes to management over the past 18 years.

Generations of leaders in NAB and MLC have not embraced each other and seen what either side could bring for the benefit of the other. The ideal situation would have been offering commercial lending and mortgages to the MLC client base via a NAB banker working with the MLC financial planners.

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But very little of that was achieved. The converse was equally poor with very little wealth management and corporate super sold to the NAB client base.

Instead MLC pursued their own marketing path through their dealerships whereby planners marketed to their prospects of their own volition. The NAB commercial bankers and mortgage specialists were locked out of the dealerships with everyone protecting their own client base.

A little known fact is the original NAB/MLC merger plan was to shut down MLC's head office in Sydney and move the MLC head office functions to Bourke St in Melbourne to force people to work together.

But the then CEO Frank Cicutto thought it was too risky and unilaterally stopped it. The current chief executive, Andrew Thorburn has successfully disposed of the troublesome UK banking business and is now transforming the bank's relationship with customers.

NAB's return on equity will rise when MLC is gone because it will remove the goodwill from the NAB balance sheet. It is ironic that NAB's bankers will actually earn more bonuses without having the pressure of cross selling products.

Turning to the NAB's half year results, the numbers were messy because of a $755 million restructuring charge and a sharp downturn in financial markets revenue. The business and private banking division was a stand out with cash earnings up 8.3 per cent to $1.48 billion and revenue up 6.3 per cent to $3.29 billion.